How much will the insurer pay out? Round off the amount.

Question

Salt & Pepper Inc. (the firm) is a law firm in Rosebank, Johannesburg. Jane and John Doe are both

admitted attorneys and the owners of the firm.

Michelle was involved in a serious motor vehicle accident. She approaches the firm to assist her

with her claims and to advise on a variety of aspects related to the motor vehicle accident.

The damages to Michelle’s vehicle amount to $120 000. The market value of the vehicle is $600

000. She insured the vehicle with Shylock Insurers Ltd (the insurer) for an amount of R500 000 in

order to save on the monthly premium. Michelle’s excess is $2 000 or 3% of the total claim,

whichever is smaller.

The other party to the motor vehicle accident is Jabu. The damages to his vehicle amount to

$60 000.

Answer 1

Michelle has underinsured her vehicle, so the insurer will apply the average clause (proportional settlement).

Vehicle market value = R600,000

Amount insured = R500,000

Damage to Michelle's vehicle = R120,000

First calculate the insurer's proportion:

500,000 / 600,000 = 0.8333

Apply this proportion to the loss:

R120,000 × (R500,000 / R600,000)

= R100,000

Now calculate the excess.

The excess is R2,000 or 3% of the total claim, whichever is smaller.

3% of R120,000:

R120,000 × 0.03 = R3,600

The smaller amount is therefore R2,000.

Deduct the excess:

R100,000 - R2,000

= R98,000

Therefore, the insurer will pay Michelle:

R98,000

The R60,000 damage to Jabu's vehicle does not affect this calculation unless the question also asks about Michelle's third-party liability coverage.